When a family member reaches out for a loan, many of us naturally want to help. A 2019 Bankrate survey found that 60 percent of Americans have lent cash to friends or family — but 21 percent say it took a toll on their relationship.
“There’s a lot of room on both sides for there to be hurt feelings that can generally burden the relationship,” says psychologist Joshua Coleman, a senior fellow with the Council on Contemporary Families.
Loaning money to a loved one can create a sticky situation, so here are 5 tips for lending money to family members and friends.
GAUGE YOUR COMFORT LEVEL
If someone asks you for a loan, think about your relationship first. Is there mutual respect, or does it feel one-sided? Is one person more of a “taker”?
“When you loan money to a family member, you have to have it in your mind that you might not get repaid, or the person may repay you much more slowly than you want them to, or you might have to nag them, and that may not feel good to you,” Coleman says. “You really want to think things through before you have a conversation with them about it because these kinds of things can overly burden a relationship.”
Before saying yes, ask yourself: If they never repaid you, would it ruin the relationship?
MAKE SURE YOU CAN AFFORD IT
When someone we care about is in need, it’s easy to overlook our own well-being in order to help. Even if you feel good about loaning the money, can you reasonably afford to do so? It’s important not to put your own financial health in jeopardy.
Draining your emergency fund, borrowing from your retirement accounts or accumulating debt of your own could impact your financial obligations and long-term goals. Look at your budget and decide what you can realistically give without taking on a financial burden. If you’re unable to give the full amount requested, perhaps a smaller loan will still be appreciated.
CLEAR IT WITH YOUR PARTNER
Making a big financial decision without your partner’s input could cause friction. Even if the amount you’re thinking of loaning is relatively modest, your partner may not be on board. And while it may be tempting to quietly loan the money without telling them, keeping this type of secret is a form of financial infidelity.
Be honest and upfront with your partner from the start. Explain why loaning the money is important to you, along with the borrower’s plan for paying it back. You may need to compromise on the amount you give so that you’re both comfortable.
DOCUMENT THE DETAILS
Even if you’ve settled on a friendly loan, be sure to lay out the details beforehand. Have both parties sign a note that shows the loan amount, when it will be paid back, the rate of interest, any collateral or security, and any other important details. If the loan ends up becoming a gift, keep in mind that, depending on the amount, you may have to fill out a gift tax form with the IRS.
“It’s really important to be proactive,” Coleman says. “It’s better to err on the side of being a little too detailed than just assuming it’s going to all work out in the wash.”
Coleman adds that the borrower may have unrealistic expectations about how quickly they’ll be able to pay you back; perhaps they’re embarrassed and want to reassure you that they’ll make good on the loan quickly. If you get that sense, slow the conversation down and walk through the repayment timeline together.
KNOW THAT IT’S OK TO SAY NO
You may ultimately feel uncomfortable about loaning money to a family member — and that’s OK. Just bear in mind that the person asking may have their own feelings of shame over making the request. Be mindful of that, Coleman says, so that your response comes from a compassionate place.
"You want to say that it’s perfectly fine that they asked and that you’re really sorry they’re in the position that they’re in — and you’d like to be able to help them but are not able to now,” he says. “And then you’re going to have to hear how that feels for the other person. You may have to take time to empathize with it.”
No matter what you decide, listen to your instincts and make a realistic plan that feels good for both parties.